Over two years have passed since President Obama signed the Jumpstart Our Business Startups (JOBS) Act; however, the Securities and Exchange Commission (SEC) is still working to finalize the rules that would allow average Americans to use it to its full capacity. The JOBS Act was designed to encourage funding for small businesses in the United States by easing several securities regulations, and while portions of it have aided entrepreneurs, its potential has yet to be fully realized.
Title III of the Act would allow startups and small businesses to use equity crowdfunding to raise capital from ordinary citizens, often referred to as non-accredited investors. Small business owners would be allowed to raise a certain amount of capital (depending on the state) per year from these types of investors, which would provide a new solution to the age-old problem of undercapitalization, a key reason why many companies fail.
Small businesses and startups have long been considered a major cause of economic growth. Not only do they provide new job opportunities; they are often innovators of new technologies that lead to enhancements in productivity. Access to human capital and advancements that lead to higher productivity are key inputs to successful economic expansion. Many American entrepreneurs and investors are keen on this idea. After all, a company cannot grow without readily available capital.
Entrepreneurs across the nation have grown tired waiting for Title III to become finalized, so they’ve turned to their state legislatures to get bills passed that allow intrastate crowdfunding. As a result, at least 20 states have introduced legislation that deal with crowdfunding exemptions.
It’s understandable why the SEC is proceeding with such caution regarding the federal crowdfunding laws. Investments in startups and other privately held businesses can be risky, but with greater risk often comes greater reward. For non-accredited investors, intrastate crowdfunding will create a whole new asset class that they previously did not have access to. It would allow them to potentially increase their total returns from their investment portfolios over time, and have a hand in aiding their local economies in the process.
Crowdfunding has been around long enough now for people to see its potential to drive additional capital to small and emerging businesses. In fact, businesses have been raising funds from accredited investors through crowdfunding for some time now. Companies like Bitvore, based in Irvine, CA, have used crowdfunding platforms like EquityNet to raise $4.5 million from accredited investors. Allowing unaccredited investors to participate in it would inject even more vast sums of capital across the country to help entrepreneurs launch and expand their businesses. According to industry research by Crowdsourcing.org and the World Bank, crowdfunding generated $5.1 billion in funding transactions in 2013 and will surpass $300 billion in funding transactions by 2025. Bitvore is just one of thousands of companies that have successfully raised capital through crowdfunding, demonstrating the impact that it can have on funding emerging businesses.
Allowing unaccredited investors to invest in private companies on state level leverages the inherent ability of crowdfunding to help entrepreneurs who have traditionally been disenfranchised from the market. Intrastate crowdfunding allows nearly anyone to support companies they believe in and provide more opportunities to all entrepreneurs, regardless of sex, race, or financial situation. Entrepreneurs can take advantage of the “wisdom of the crowd” to help their companies succeed.
In lieu of Title III, intrastate crowdfunding is currently the best option for entrepreneurs to quickly and efficiently raise capital. As with any new development, some markets will be slower to adopt it than others, but benefits that it can provide to states’ economies will become evident as more people begin to participate.